Can Amazon Beat PayPal?

3 advantages and 1 big disadvantage Amazon has versus PayPal

Amazon.com(NASDAQ:AMZN) announced a new service this week that allows its 215 million-plus customers to pay for goods and services more easily anywhere on the Internet. "Login and Pay with Amazon" is a shot aimed directly at eBay's (NASDAQ:EBAY) PayPal, which has been facilitating online payments for years. Can Amazon really compete with the established leader in the space?

When I think about shopping online, I think of ...Amazon is ingrained in people's minds as the place for online shopping. Offering other online sellers the option to associate their brand with Amazon is a key advantage of the new service.

Small unestablished e-tailers, in particular, may get a boost of consumer confidence from the option for customers to pay with the same protection and guarantees as a payment on amazon.com.

Now with 60% more credit cardsAmazon has 215 million active credit cards on file, 63% more than PayPal's 132.4 monthly active users. This size advantage could lead to a significant number of merchants adopting the service to ease transactions for more customers.

Remember, payment services like PayPal are designed to reduce friction; customers don't want to have to enter their credit card information again. More cards on file means fewer customers will hesitate to enter their information.

But, size isn't all that matters. Google(NASDAQ:GOOGL) has been experimenting with e-Payments for a long time through its Google Wallet service. The service has largely failed due to a lack of focus. Despite hundreds of millions of user accounts on file, Google has been unable to move the needle as a payment processor.

Perhaps Google's failure is due to its lack of association with shopping or its scattered focus between online, mobile, and peer-to-peer payments. Either way, Amazon seems to have a clear advantage over Google despite fewer accounts.

Just as easy as shopping on amazon.comAnother key advantage Amazon has over PayPal, is the ability to login to a website with your Amazon account. Amazon actually rolled out a stand-alone "Login with Amazon" service in May for websites to reduce the friction of signing up for a whole new account.

Facebook(NASDAQ:FB) has seen success by offering merchants, apps, and websites the options to have users login with their facebook.com credentials. Like "Login with Amazon," it offers a similar low-friction login for developers, and Facebook is able to collect more data on its users. With the data, Facebook can better target advertisements to its users, which allows them to charge more per click.

"Login and Pay" is simply an extension of the "Login with Amazon" service that allows merchants to use Amazon's customer payment information. In this way, the new service is much like an extension of its Amazon Marketplace service for third-party sellers.

1 big reason merchants might not want to work with AmazonFor most online merchants, Amazon is their competition.

You better believe Amazon will be analyzing the data it gets from its commerce partners, searching for opportunities to expand into. Even small niche retailers may not want to share their customers' purchase data with Amazon, as the company has a history of ruthlessly pursuing popular and profitable categories. That's the kind of information that could turn Amazon from a friend to an enemy.

While Amazon will make a profit from processing payments for other merchants, it has a lot more to gain from taking their business altogether. Amazon's CEO Jeff Bezos is always looking at what other companies are doing. Do these companies really want to give him a magnifying glass on their operations?

PayPal, on the other hand, doesn't compete directly with other online retailers. Even its parent company, eBay, doesn't sell products to end customers. The one thing that sets eBay apart from other e-commerce companies is that it always acts as a facilitator -- whether that be through its flagship marketplace or PayPal service, it offers merchants a better way to reach customers. That's what makes it a great option for reducing friction at checkout.

When the customer isn't right"Login and Pay with Amazon" looks like a great service for customers, and happy customers usually lead to good business. In this case, however, there's a viable alternative for merchants in PayPal (perhaps coupled with Facebook) that will act as a partner instead of a frenemy. That's a hurdle that will be tough for Amazon to overcome.

Adam Levy owns shares of Amazon.com. The Motley Fool recommends Amazon.com, eBay, Facebook, and Google. The Motley Fool owns shares of Amazon.com, eBay, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Adam has been writing for The Motley Fool since 2012 covering consumer goods and technology companies. He spends about as much time thinking about Facebook and Twitter's businesses as he does using their products. For some lighthearted stock commentary and occasional St. Louis Cardinal mania Follow @admlvy